Q2 2021 LKQ Corp Earnings Call
Okay.
John.
[music].
Good day, and thank you for standing by.
Welcome to the Alky Q corporations second quarter 2021.
Earnings Conference call.
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I would now like to hand, the conference over to speakers the day.
Mr. Joe Boutros Vice President.
Further of Investor Relations for <unk> Corporation Sarah.
Please go ahead.
Thank you operator, good morning, everyone and welcome to Lkq's second quarter 2021 earnings conference call with US today are Nick Zarcone Lkq's.
President and Chief Executive Officer in the room, Arroyo Executive Vice President and Chief Financial Officer. Please refer to the LKQ website at LKQ Corp, Dot Com for our earnings release issued this morning as well as the accompanying slide presentation for this call now let me quickly cover the safe Harbor. Some other statements that we make today may be considered forward.
Okay.
Statements regarding our expectations beliefs hopes intentions or strategies actual events or results may differ materially from those expressed or implied in the forward looking statements. As a result of various factors, we assume no obligation to update any forward looking statements for more information. Please refer to the risk factors discussed.
Forward, but in our form 10-K, and subsequent reports filed with the SEC. During this call. We will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and slide presentation.
Hopefully everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today.
And as normal we are planning to file our 10-Q in the next few days and with that I'm happy to turn the call over to our CEO Nick Zarcone.
Thank you Joe and good morning to everybody on the call. This morning, I will provide some high level comments related to our performance in the quarter and then for rune will dive into the financials.
Financial details as well as our improved outlook for 2021 before I come back with a few closing remarks.
This was another quarter of significant operating progress driven by excellent execution and improved business conditions I cannot be prouder of the LKQ.
Team.
Few years ago, when we pivoted to operational excellence, we knew that there would be a transition period during which we would need to invest in our people and processes to improve the operating model.
We also recognize that there would be difficult decisions needed to right size the.
Cost structure and drive efficiencies, we undertook this shift with the expectation that we would come out the other side as a leaner more nimble and stronger organization.
John that could succeed in difficult conditions like we have seen with the pandemic over the past year.
As well as thrived during the good times.
Those expectations are being realized.
While I'm not ready to proclaim mission accomplished I believe we have made tremendous progress in our operational excellence transition as evidenced by the continued outstanding results that we've delivered.
But over the past year.
Record outcomes don't happen by accident and the team has driven strong profitability and cash flow.
By among other actions.
Applying a disciplined pricing approach implementing permanent cost saving actions.
A liver in closing underperforming locations consolidating delivery routes and reducing head count.
Tightening our operating policies to reduce waste and increase yield such as harvesting more catalytic converters per car.
Actively engaging with our vendor partners to ensure.
Sure that we are receiving attractive pricing and market payment terms.
And monitoring our receivables so that we minimize past due balances.
Now onto the quarter.
We were able to produce yet another record quarter.
Indeed.
Each of the last 4 quarters results represent the highest earnings per share reported in the respective quarters with Q2 of 2021, reflecting the first quarter with over $1 of earnings per share and the highest segment EBITDA margins in over a decade.
For the room, we'll dig.
Dig into the margin detail shortly.
Revenue for the second quarter of 2021 was $3.4 billion, an increase of 31% as compared to the $2.6 billion in the second quarter of 2020.
In the second quarter parts and services organic.
You increased 22%.
While the net impact of acquisitions and divestitures decreased revenue by 3 tenths of 1% and foreign exchange rates increased revenue 5.4%.
This creates a total parts and services revenue in.
Revenue of 27%.
The organic revenue growth for the quarter reflects the annualized nation of the pandemic impact during Q2 of 2020.
Net income for the second quarter of 2021 was $305 million as compared to $119 million for.
Credit same periods in 2020, and an increase of 157%.
Diluted earnings per share for the second quarter was $1 <unk>.
As compared to 39 for the same period last year, an increase of 159%.
On an adjusted basis.
For the <unk> in the second quarter was $340 million compared to $161 million in the same period of 2020, a 111% increase.
Adjusted diluted earnings per share for the second quarter was $1.13.
As compared to 53.
For the same period of 2020, a 113% increase value.
Let's turn to some of the quarterly segment highlights.
Slide 5 of our presentation sets forth the monthly revenue trends for the quarter and debt you can see coming off a low base of the second quarter of.
Net debt.
The growth rates improved significantly year over year for each of the segments.
With April and May being the most notable.
The vaccination rates in our key geographic markets is encouraging for Europe in particular witnessed a solid increase in vaccinations throughout.
<unk> 2012 quarter, although it still lags the United States.
We like many are closely monitoring the delta variants and the risk of policy actions potentially slowing economic growth. That's a variant we're too rapidly spread.
Turning to North America.
According to the U S Department of energy fuel consumption for the second quarter was 28% above the prior year and 5% below the second quarter of 2019.
From Slide 6 you will note that organic revenue for parts and services for our.
American segment increased 19, 7% in the quarter on a year over year basis.
When looking at our performance relative to collision and liability repairable claims data in the quarter.
Given the operations associated with the significant swings in 2020, we believe the most.
North America in comparison is to the second quarter of 2019.
During Q2 organic revenue for parts and services for our North American segment declined about 9% on a per day basis relative to 2019, while repairable claims.
Most of all declined 15%.
So another period of outperformance for our North American operations.
I want to highlight a couple of examples of how the North America team continues to push the operational excellence initiatives.
In 2019, our North America team.
<unk> initiated a lean operating strategy based on the principle of doing more with losses.
During the first step of this strategy. The team asked a simple question what does winning look like.
The answers to that question allowed the team to unify and developed several key performance.
Indicators that were deployed in early 2020 prior to the pandemic and we immediately generated positive results.
We are now in the second phase of this strategy, which is systematically implementing a lean roadmap to optimize those kpis.
We are.
Interest you mean, the team towards daily management system, which addresses safety quality delivery and our customers. This system is improving our communication and accountability, while driving root cause and corrective actions along with sustainable sharing of best practice.
<unk> in Q2, our salvage procurement team began utilizing artificial intelligence to optimize the procurement of the salvage vehicles, we bid on at auction.
This artificial intelligence uses computer vision, a technology that allows the algorithms to.
Reason based on images.
To assess the specific damage on each vehicle and to determine which parts can be recycled and we used.
This technology enhances the human element of our procurement processes to further.
<unk> improve our part yield per vehicle.
And to.
Advance the quality standards of each part.
Additionally, during the quarter, our elite Tech business expanded its services beyond onsite mobile diagnostics and repair to also include remote automotive diagnostics and remote programming moving onto our European.
<unk> segment.
Organic revenue for parts and services in the second quarter increased 27% on a reported basis and 19, 2% on a same day basis.
When compared to 2019, our European revenue was down about 2.
<unk>, 2% on a per day basis.
Our regional operations continued to experience very and revenue performance in the quarter, but each market was positive on a year over year basis.
Our UK business had the strongest recovery largely due to our favorable.
Tori availability relative to the competition and we are confident we're gaining share in the U K market.
I'm also pleased to say that we are witnessing some modest market recovery in Italy, a market that was dramatically impacted by the pandemic.
But it continues to remain a drag.
On the revenue growth and margins for the overall segment.
As you can see from the significant expansion in the European margins, we are making excellent progress on our 1 LKQ Europe program.
Since September 2019, when we first announced the program for Europe.
European EBITDA margins have increased about 300 basis points from 7.7% in the second quarter of 2019 to 10, 7% in the second quarter of 2021.
In reality, there have been 2 distinct components to this effort.
1.
Sensational and relates to creating a fully centralized pan European leadership team and functional structure.
The other is execution related which focuses on the key initiatives outlined in prior communications, such as procurement logistics and local projects.
Over the <unk>.
2 years, we have been working both components simultaneously.
And I am happy to announce that we have completed the organizational transformation. We now have all the right people in the right seats and a streamlined structure that reflects a single business as opposed to a collection.
As Oregon are independent businesses, the execution element will be with us forever and it will be the driving factor behind the continued productivity improvements in the years to come.
Few other items to note in Europe would include debt during the first week of July we began onboarding the first group.
Of about 25 employees for our innovation and service center in <unk> Poland.
For CVC project in the Netherlands remains on track and the start of that major warehouse operation is planned for March 2022.
And our ERP.
Implementation at Riyadh in Italy went live on July 5th.
Some of you may have noticed that on July 14th.
The European Commission came forward with the fit for 55 proposal, which accelerates and detailed plans for a greener economy and.
We're seeing net emissions in Europe by at least 55% by 2030 compared to 1990.
As a leader in the circular economy, and the largest vehicle on parts recycler worldwide.
<unk> embraces the global effort to reduce.
<unk> emissions.
Our European segment, and also them economically where we have a 26% stake are first movers in supporting our customers for service and repair of hybrid and electrical vehicles.
According to <unk>.
The.
You factor.
Do think automobile manufacturing association of Europe Danny.
Banning a specific technology is not the sole and rational way forward and internal combustion engines, including hybrids need to play a role in the transition to zero emissions.
Now, let's move on to our specialty segment.
Church again knocked the cover off the ball during the second quarter by reporting organic revenue growth of 31%.
Specialty had a record breaking quarter in terms of revenue EBITDA dollars and EBITDA percentages.
As witnessed in Q1 the drivers of.
This tremendous performance continued to be the strong ongoing demand for parts related to <unk> and light trucks.
Combined with a very disciplined approach to controlling cost.
We also believe that the stimulus checks benefited the specialty business in the quarter.
Across.
All of our segments, we are experiencing some level of supply chain shortages and disruptions.
These disruptions are creating products scarcity and price delays that are resulting in meaningful availability pressures in certain product lines.
The supply chain challenges are also driving products.
Completion.
<unk> in turn is generating the most robust pricing environment, we've seen in years.
Across all of our segments, we have been very effective in passing along these cost as witnessed by our margin performance.
Alongside supply chain inflationary pressures.
Like many businesses across the globe, we are facing wage inflation and increased competition for labor. We are constantly looking at our wage structure and turnover rates across all of our segments to ensure we stay ahead of any competitive pressures and help backfill the open positions with the.
Candidates, we can attract.
From a corporate development perspective in the second quarter, we acquired the business and assets of Green being battery, a hybrid battery recondition or an installer.
Also in Q2 worn acquired Fab Tech industries, a leading.
<unk> manufacturer of aftermarket suspensions for light trucks and Suvs.
Tech brands, which include <unk> and stealth shocks are widely recognized premium offerings and the off road racing and performance segments and are a tremendous complement to our lineup worn.
<unk> products.
Both of these small tuck in acquisitions represent our ongoing effort to evolve our product offerings to match the changes taking place in the car park and to leverage our robust networks across all segments to sell deeper into existing and prospective customers.
Lastly, I am proud to announce that during the second quarter MSCI increased lkq's ESG rating from single to double E, which is the second increase in the past 2 years.
This new double a rating places us in the top 19% of.
That's true.
Also earlier this month.
<unk> significantly increased our social and governance quick score ratings. Please referred to slide 18, which highlights our environmental stewardship in the quarter and I will now turn the discussion over to <unk>.
<unk>, who will run you through the details of our strong second quarter performance.
Thank you Mick and good morning to everyone joining us today before I cover the financial results I want to highlight a number of significant events and accomplishments related to our capital allocation over the recent.
Our own past.
With the visits to operational excellence in 2018.
Our approach to balance sheet and capital allocation move towards targeting investment grade credit metrics.
This strategy placed an emphasis on generating strong sustainable free cash.
Maintaining a conservative leverage position and deploying capital to the highest return opportunities.
I am very pleased to report that we've made remarkable progress on all measures and getting the validation of an investment grade rating from Fitch. This past may.
Is a tremendous achievement for the organization.
Looking back at the last 6 months starting just after we completed the Shiloh grew by acquisition, we have produced $3.8 billion in operating cash flow, which supports in nearly 80% conversion rate of free.
Cash flow cash flow relative to EBITDA as shown on slide 14 of the presentation. We've used these funds to repay $2.1 billion of debt, which resulted in de levering the balance sheet from 3.1 times net leverage as of June 2018 to 1.
1.2 times as of June of 2021.
Additionally, we have repurchased over $800 million of LKQ stock at an average price of approximately $33 per share or roughly 35% below the current share price.
Free cash we have not sacrificed investments in the business. During this period with roughly $660 million of capital expenditures invested to support our growth and operate more efficiency.
Transitioning from the consolidation phase of the company's evolution acquisitions.
<unk> has been a relatively small part of the capital allocation, though we remain committed to targeted tuck in acquisitions that deliver high synergies all critical capabilities.
Our actions over the last 3 years has put the company in a very strong liquidity position, which has allowed.
<unk> us to complete the following during the second quarter.
First we delivered a further $411 million in operating cash flows as we converted 79% of our EBITDA into cash.
We redeemed the 3 quarters of 1 billion euros.
2006 Euro notes on April 1st the earliest available redemption date with funds from our lower cost revolver as well as cash on hand.
We repaid the full amount of the remaining term loan of approximately $320 million ahead of schedule.
Again, using funds from the revolver and cash on hand, and we repurchased $304 million of LKQ stock.
Highest level of quarterly purchases to date.
With our debt transactions, we reduced overall liquidity by utilizing available capacity on the revolver.
We believe future cash flow needs can be supported by these smaller facility. So we eliminated the term loan and move more funds to the revolver, which in turn will lower borrowing costs even further.
We continue to believe that LKQ shares represent good value and our repurchases.
<unk> reflect that belief as shown on slide 17, we have continued to purchase shares under a <unk> 1 plan in July with an additional $100 million invested through last Friday.
Since we are nearing a $1 billion authorization, we went to our board of directors for.
All of our increase in the total authorization to $2 billion.
The board approved the expansion and we now have the ability to repurchase if further $1 billion through October of 2024.
Now I'll move to the financial results.
As Nick described Q2 was it.
A very successful quarter with positive contributions coming from revenue growth gross margin expansion and operating expense leverage.
Gross margin was a highlight for the quarter.
Increasing 270 basis points for relative to the prior year or 250 basis points on an adjusted.
<unk> basis.
The margin improvement is more noteworthy as it came in a period in which input costs rose across each of our segments. We remain disciplined in our pricing and as a distributor we have been able to pass through the higher input costs coming from the supply chain.
Gross margin also.
<unk> also benefited from the tailwind of commodity prices as you can see on slide 28 scrap steel in precious metal prices, which have been mostly favorable over the last year provided additional benefits this quarter.
We estimate that scrap steel in precious metal prices added roughly 50.
$7 million and segment EBITDA and approximately <unk> 14 per share in adjusted diluted EPS relative to last year.
While we started to annualize some of our permanent cost reduction <unk> enacted in 2020, there was still an incremental benefit.
Second quarter.
SG&A expenses as a percentage of revenue showed the favorable leverage effects of the cost actions and the other revenue growth.
Dropping to 26, 2% in the quarter or 190 basis points better than Q2 of 2020.
Even with the tailwind related to commodity prices the largest share of the year over year increase in adjusted diluted EPS related to operating performance.
Now turn to debt operating performance with our segment highlights starting on Slide 10, North America produced its highest.
Highest segment EBITDA margin in the company's history at 28%.
Q2 is the fourth consecutive quarter that we've been able to make this statement the.
The primary factors behind the improvement are similar to the last few quarters as the segment continued to benefit from ongoing gross.
Initiatives.
Permanent cost reductions.
Still driving cost out of the business and we currently estimate the permanent cost savings to be $105 million.
A $25 million increase relative to the figure shed in last September Investor day presentation.
Additionally, the commodity pricing benefits on gross margin and operating leverage I mentioned earlier are seen him helping to drive that North America margins above our long term expectation.
As seen on Slide 11, Europe reported a 10, 7% segment EBITDA margin.
Margin, which represented a 330 basis point improvement over last year.
With a year to date margin of 10, 2% we are on track to deliver on our margin goals.
Europe is benefiting from the revenue recovery improved net pricing and cost containment actions taken in the.
<unk> debt.
Moving to slide 12 specialty continues to execute its operating plan.
<unk> well.
Similar to Q1 specialty generated significant revenue growth in the quarter without sacrificing margin and continued to effectively manage operating.
<unk> cases.
For the segment EBITDA margin of 14, 9% is the highest quarterly figure since the business was acquired in 2014.
We are also delivering meaningful savings from our focus on the capital structure and.
The early redemption of the 2000 <unk> thousand 6 euro notes.
<unk> created interest expense savings. Additionally, deploying free cash flow to debt Paydown and share repurchase is generated interest expense savings and an EPS benefit from a reduced share count we estimate that these factors added approximately <unk> <unk> per share to.
To our second quarter results.
Additionally, mechanism and solid performance and other investment income improvement generated another <unk> <unk> of year over year growth.
Given the improved expectation of full year profitability, we decreased our projected effective tax rate in our outlook.
From 26, 5% to $26, 2.5%, which had a nominal benefit on.
Quarter.
So to recap our adjusted EPS of $1.13 is a 60.
Increase from Q2 of 2020, which was a low.
<unk> comparable given the pronounced COVID-19 impact last year.
The commodity benefits along with the increase is attributable to investments the tax rate our capital deployment and a slight tailwind from foreign exchange produced about 20.
Of the improvement there.
The remaining 40.
Comes from our operating performance for.
Focusing on profitable revenue growth enhancing gross margins and controlling our overhead costs.
And this should be the key takeaway revenue considering the second quarter results.
I will wrap up my prepared comments.
With our updated thoughts on 2021.
Consistent with the level of detail we have provided in recent quarters, we are comfortable making the following statements all of which assume debt additional mobility restrictions beyond water. Currently in place are not implemented in our major markets.
Foreign exchange rates hold near recent levels, and scrap and precious metal prices trend lower in the second half of the year.
Number 1 we believe that our parts and services revenue will be higher than 2020 on a full year basis, and we will continue to recover.
For North America.
And European segments in the second half of the year Hasnt mobility trends benefit from further progress on vaccination rates.
We expect the second half growth rates to decline relative to what we reported in the most recent quarter endemic effects where margin as of yet in the second.
2020 for our business.
While we expect demand for our specialty products will remain strong we anticipate the growth rates to be lower than the first half of the year due to the second half seasonality and the expected end of the stimulus program.
As discussed.
Previously we will have 2 fewer selling days in North America in 2021, with 1 having a cash in Q1 and the second to occur in the fourth quarter, while Europe is absolutely overall with 1 day shifting from Q1 into Q2.
Second.
With another excellent quarter in Q2, we are projecting full year adjusted diluted EPS in the range of $3.65 to $3.75.
With a midpoint of $3.65.
This is an increase of 55 cents.
For 18% had the.
Quint.
Our most recent prior guidance.
This increase reflects the outperformance in Q2.
In addition to higher anticipated result in the second half of the year as we expect the benefits of our ongoing margin and operating expense programs and our strategic cash deployment.
To outweigh strong inflationary headwinds related to labor freight fuel and inventory costs.
Throughout the industry.
Yeah.
I began my comments by noting the significant progress we've made on our capital allocation strategy, including outside.
The midpoint cash flow generation in the second quarter.
With this in mind, along with the higher projected net income for the year, we are raising our free cash flow guidance to a range of $950 million to $1 billion and $50 million with $1 billion at the midpoint.
We still anticipate.
Outstanding debt and inventory build in the back half of the year ahead of the traditionally strong Q1, and Q2 seasonal demand in the interim our teams with the active support of our vendor partners continue to expertly navigated the situation to ensure that we have the right path and the right places.
To best serve our customers.
And finally, the European payables optimization program remains on track and will help to partially offset the impact of the inventory build on cash flow.
Thank you once again for your time this morning, and with that I'll turn the call back to Nick for.
His closing comments.
Thank you for Arun for the financial overview.
Let me restate, our key initiatives, which continue to be central to our culture and our objectives.
First we will continue to integrate our businesses and simplify the.
Operating model.
Second we will continue to focus on profitable revenue growth and sustainable margin expansion.
Third we will continue to drive high levels of cash flow, which in turn give us the flexibility to maintain a balanced capital allocation.
And fourth we will continue to invest in our future.
As you can see from our results our company executed on each of these initiatives in the second quarter and for that I offer a tremendous thank you for each of our 43000 plus team members.
Members across the globe that make it happen each and every day.
They define what it means to be LKQ proud.
And with that operator, we are now ready to open the call for questions.
Thank you Sir.
Some of the day to think any questions for Mike pad for us today.
<unk> reminder, if you would like to ask a question simply press Star then the number 1.
You bet.
We have our first question from the line of screening Kennison from Baird. Your line is now open.
Hey, good morning, Thanks for taking my question lots of goodness.
<unk> worked with here.
I'll focus on your credit profile and the implications for cash flow.
<unk>.
What are the implications.
An investment grade rating from Fitch on your vendor terms I guess I'm wondering will the Fitch decision caused any.
Immediate teams.
<unk> to your payable terms with key vendors, which would be a positive for cash flow.
Good morning, Craig Great question and great to hear from you, yes incredibly pleased with.
The company really firing on all cylinders across revenue margin, but also free cash flow conversion coming through and then also the way we have deployed.
With regards to your specific question about the recent investment grade reaching initiation by Fitch.
In itself it makes no change to either a credit facility or for that matter vendor terms, but if you go back and this is a public document and go through our credit facility agreement within.
We have a pre wired clause, which essentially states that if 1 of the 2 currently named rating agencies were to make LKQ and award them awarded Us a <unk>.
Investment grade rating.
Means of senior secured.
That facility drop off and that as you can imagine is a significant number which of course is just under $3 billion credit facility. So that's 1 piece, where the liens drop off and it becomes unsecured the second pieces within the credit facility, we have a current ceiling debt indebtedness to.
Our trade payables cannot exceed 180 days. So again just to recap the Fitch decision in itself does not change anything today, but clearly being 1 of the 3 key rating agencies out there and 1 of them has this view.
Our view of us.
I have no doubt that.
Given the ongoing discussions with the other 2 rating agencies.
AI will come around I don't believe it's a question of if it's more a question of when.
Got it so just so unclear you need 1 of the other 2 to make a change in order to trigger some of those changes in your contracts debt.
That is correct.
Thank you.
Thank you. The next 1 is from the line of Daniel <unk> from Stephens, Inc.
Please go ahead.
Yes, good morning, guys good morning, Daniel.
I wanted to start in North America.
Obviously the growth.
The margin was really strong and part of it you noted are driven by metal.
You talk about how the team handled that strong revenue growth with a lower head count have you been able to keep out as many of the expenses that you anticipated.
And have there been any hiccup.
And hiring when you need to given the employment backdrop.
Daniel Good morning, Yes, it is of our announced yet.
An excellent question.
Before I get to the specifics of answering your question I just want to make sure that.
All of our 40 feet plus pounds and associates globally, given the big Shoutout, what our field teams have done globally from branch to a warehouse to a dismantling yawn.
And listen there has been nothing short of phenomenal.
Success LKQ success is directly attributable to our field teams. The last 17.18 months have not been easy, but the other ones that have kept this company humming, along and really exceeding everyones expectations and pushing up yet another.
Quarter, yes.
Yes, Youre right with regards to North America margins at 28% in the current quarter or 19, 9% in Q1. This is higher than what our long term expectation has been as I've been very clear book into first quarter.
Other revenue most recently in my prepared comments precious metals has been a benefit and we estimate and if you're going to see slide 28 in the earnings deck, we've actually given transparency in terms of how scrap metal and precious metal prices have been trading and really what level of benefit has come through we estimate roughly 350.
And that points of debt, 28% margin that North America has put out is directly attributable to scrap and precious metal prices. Even if you were to take that piece out of the business is still delivered well north of 17 points and so that really is what gives us a lot of comfort could we have done better.
But there are inflationary pressures I would say the single biggest challenge at this point of time, not just for LKQ, but it's across the entire industry here in the United States has been labor and labor essentially whether it'd be availability or whether it would be the cost to get that labor. It is needing to congestion at ports.
It's leading to higher freight cost because delivery drivers are incredibly difficult to find but that has been the key piece and that's why I come back full circle in terms of giving a massive shout out to our field teams, we have been running short.
With regards to labor availability, we have taken wages up also.
Perhaps just to make sure there will be a market competitive, but we haven't got branch managers top managers, dms going and making deliveries because we want to make sure that while we have the right part of the right place. We continue to serve our customers without customers. We really don't have a business and just wanted to make sure that that.
Also heard loud and clear a few folks such as an outstanding John.
That's great really helpful color and then just a follow up on the North American margin.
Obviously right metal prices, you called out the $51 million in EBITDA.
That part of what's out there raising your Cogs in North America, if I look for good buys I think sales service cost.
53% salvage vehicles drove 30 day.
So if metal prices rollover should there be some natural offset and that is your cost to acquire vehicles at auction would go down as well, yes, absolutely. Yes, I think that's what we've kind of said in the earnings deck holes so that.
<unk> prices have been running pretty high.
It is quite some time.
But again, it's partly to do with that.
For the dollar has been trading for lots of export credit has been taking place as we know there's been a shortage of chips and so OEM sales have come down as a result used car prices that the non precious metals are up that is set to be flowing through Cogs also there.
There is no doubt about it.
Great. Thanks, so much guys and best of luck going forward. Thank you Daniel.
Thank you the next 1.
Brian Butler from Stifel. Your line is now open.
Good morning, Thanks for taking my question.
Good morning, Brian.
First 1 just.
Kind of on that point of the labor in and kind of inflation can you, maybe just kind of rank where you see it I mean, it looks like labor is at the top book.
And kind of put in perspective on magnitude where does freight and fuel.
Fall below that on the inflation pressures.
I would put that in probably that.
Net order labor first because you have to remember that over 60% of our operating expenses ultimately come back to the people. It's the biggest portion of the.
On the P&L or the biggest expense and so.
And we have 43000 plus people around the globe. So that's number 1.
1.
Second would be would be great.
And that not only relates to ocean freight which is up significantly but also.
The domestic freight whether it be in the U S or in Europe.
And then.
Some people put fuel as part of freight we try and separate it out obviously, if you can track oil price as they've been up is as well.
I'd point, you to page 7 of our deck, which kind of sorts out.
Where we have saved money.
Over the past year.
So and most of the savings has been in on the people side and then secondly on the delivery side, and then finally kind of facilities and the like so.
Again, I would put it in that order of think about people for.
And then fuel.
Okay. That's helpful. And then just my follow up.
When you think about the M&A pipeline.
<unk> has been recently on kind of the operational excellence can you give a little color on where that.
M&A pipeline stands and what might be targeted.
And the.
Next year or 2 what assets you are still looking at absolutely. So I mean, we are always looking for ways to.
<unk> to our strength as our organization and whether that comes in acquiring in.
New geographies, where we don't have a presence.
There is comes from acquiring.
New product lines or new skill sets.
Obviously the focus currently is on.
Kind of newer technologies right. So we've made a number of acquisitions over the last year and the whole diagnostics and calibration space and we are building.
For a very nice business there.
As you know and we mentioned in the call the Green Bean Act.
Acquisition in Q2 that relates to battery technologies and again, we all know that ultimately.
Battery being able to service and deal with the EV batteries.
Whether it's for hybrids or battery electric.
Vehicle batteries is going to become important so you should expect additional investment in that area. So anything we can do to evolve our product and service that in.
And the services is a key component there relative to the.
Pollution of the car Park, that's where we're going to do.
And so you should expect that you will see.
Additional acquisitions, probably smaller because particularly in these newer technologies there are no big companies out there to buy.
So we can again make sure that we are on the cutting edge as it relates to what.
We can provide our customers.
And Brian This is very consistent with what we've been talking about for quite some time, including at our Investor day, but.
M&A, while it may seem that the pace of M&A has slowed down not really the focus has been different rather than growing whale hunting.
The European segment was built up the focus has really been as Nick said the focus has been on high synergy tuck ins and building critical capabilities and that focus remains.
Great.
Yes.
Sure.
Thank you. The next 1 is from Bret Jordan.
From Jefferies. Your line is open.
Morning, guys good morning, Brian.
Hey, <unk>.
<unk>, if you do get a second rating agency to tip your way.
Would be sort of a shorter term impact I think you are close to 50% accounts payable to inventory, but what kind of step up would you see if you got to invest.
Dan.
Great question Brent.
The biggest uplift really will be from our European business and just given the nature of the European business and how we compare that from April to optimization program relative to.
To say the big for here on Hotbox items on North America.
North.
<unk> business per se.
We have some opportunity, but if you think of the salvage business, where the sales have a full set is just a different business model right. So if you think about the size and scale of our European business, which at this point of time is roughly half the company that really is where the opportunity is and we Saturday.
We see that there's further upside on that not just with.
The fact that we would get the investment grade rating at some point to chime in for the 180 day ceiling, obviously gets lifted that's more for tactical piece, but more of an ongoing basis.
<unk> how that continues.
It's active discussions with a number of our vendor partners. The focus really had been let's get to the top 40 and then the team continues to go further down the chain as part of the overall supplier rationalization discussions, making sure that we continue to GAAP cogs at attractive prices.
It also at what we believe to be market convention tons.
Okay. Thanks, and I guess, a quick question on supply chain is the disruption and in sort.
Inventory availability of actually a positive for you in the sense that you're gaining share as others are maybe oes are less available and I guess do you have anything anecdotal.
But what percentage of repairs are now alternative parts in North America, Yes, Brad Great question, obviously, the supply chain not just in our industry, but in most industries is under duress at the moment.
For us it really depends.
Actually in the business and the products.
Decline because there's significant differences across the the LKQ platform.
Why can salvage theres no impact because all of that product is here and it's it's easy for us to get at the auctions.
Our aftermarket business here, however, most of the aftermarket collision products for the whole industry.
Anecdotally <unk> comes out of Taiwan, and it's not an issue related to our ability to procure the products.
The manufacturers have the ability to stamp out the parts. The issue is getting it from the warehouses in Taiwan for that.
Warehouses in Tampa, or Toledo, or Topeka, but wherever we need them here.
In the U S.
Everyone knows what's going on the issues related to container capacity.
Port congestion as a major issue I mean, we've got ships sitting on the water just waiting to be unloaded.
Lack of capacity to unload the ships there is a shortage of drivers to do the drayage within the parts.
That means moving to cans around and then there is no shortage of.
Trucking capacity to actually get the containers from the port to our locations.
So what's that doing it's extending the timeframe of how long it takes us to get products.
And it's costing a little bit more money the good news is.
The vast majority of our our ocean freight is under contract.
At least.
For quite some time now and going into the future.
Spot rates as you know are up anywhere from 6 to 8 fold.
The good news is again, we are under contract we're bringing in.
15000 containers a year, that's 300 containers a week.
And I wouldn't want to be a company that's imported 300 containers, a year or 50 containers, a year, which many of our smaller competitors are dealing with so we don't have the inventory that we want.
But we can we're making it work and.
Really.
We think we're in a better position than most of the small players out in the marketplace that you move over the specialty and its different yes, they bring some products from the far east.
Almost exact same issues is in the aftermarket in North America.
But they also source the majority of their <unk>.
Domestically or at least within North America and they are the real issue is the capacity of the manufacturers, who simply cannot keep up with demand.
We would like to have more inventory in our specialty group.
We've said in the past quarters and this quarter was true as well we've probably.
And clear out some revenue because we then have products on the shelves, but again as the largest distributor and what we do we are doing much better than the smaller smaller competitors in Europe somewhere in between Brad I mean, the reality is they import less products from Asia than we do in our North American collision business.
But they are also experiencing.
Tight supplies on certain products that are produced within the EU.
EU so.
It's creating issues, but when we think we're doing a pretty good job of managing through.
Great. Thank you.
Thank you.
The next 1 we have less staff anymore for them too.
Your line is open.
Hi, Good morning, Hi, Nick Hi, Brian Hi, Joe Good morning, Good morning.
I wanted to touch on the European margin performance and expectations kind of implied in the second half of the year obviously.
Our record and pay tremendous <unk> resolved that if you just kind of backend Kelly then your updated guidance. It does account for a bit of a slowdown in the back half opex for Q2 levels, but admittedly.
The year over year for <unk>.
Just to get some color just as you kind of updated your guidance what your thoughts are for the back half in terms of the margin performance.
Why there should be some kind of slowdown from the second quarter, just any puts and takes there would be helpful. Thank you.
Good morning, Stephanie it's far enough share let me let me take that question. So first of all really pleased with how our European business continues to perform.
If you go back.
We initiated the 1 LKQ Europe program and formerly gave margin targets.
We basically called for exiting sustainable double digit margins at the end of 2021 backwards in September of 2019.
How fast time goes by but we are now in the last 6 months of debt.
At 3 year journey and the way the team has navigated.
These incredibly choppy in turbulent times with a pandemic thrown in for good measure has been nothing short of.
Phenomenal really pleased with the team out there as you obviously have made out we do have a number.
Quinn, who.
Relatively new leaders out there also but really the point being in terms of the talent that we needed we have out there at this point of time very optimistic about the future also.
To the point about your specific question about a slowdown in the second half not really.
If you actually go back and see the European business, historically, and obviously take on 2020, because that was the pandemic here or at least and it's still continuing but if you go back historically Q1 and Q2 typically our strong Q3 is also relatively strong but Q4 is typically seasonally the weakest for European.
Number is this so it really is kind of seasonal is what we are thinking about in terms of how we are forecasting that European business more than anything else as of now there are obviously.
A lot of flip flop measures taking place of the country opened as the country not opened yesterday morning, the United Kingdom said that to you.
EU and U S travelers.
That have had the double job would be welcome without a quarantine 1 never knows whether that continues or not about 4 weeks ago. We held European leadership conference that was held virtually all of our platform leaders that were on the continent did make it into European headquarters in Switzerland.
Jim.
But with the exception of our UK leadership team and again that just tells you in terms of what's happening out there, but overall the way the program is coming along how the team is executing we feel good about it and that is essentially what has led us to the first half performance, but also gives.
Islands, the confidence to be able to lift the floor on the 92 up to $10.3 up by about 30 basis points to 95, 2 at 10, 3% for this segment EBITDA margin for the European business.
Let me kind of just 1 final piece also these numbers include roughly.
Gives us 20 to 30 basis points of transformation expenses.
And at times it is easy to overlook those pieces, but that is also a drag but that is the way we have been reporting it. So that number that I. Just quoted include at least in the first half of 20 basis points drag you can obviously take.
But and clearly we do expect to accelerate the transformation efforts in the second half.
And it's definitely some of it's some of the seasonality just goes along with with holiday patterns, Obviously August tends to be.
Very soft month.
In this industry as people are on vacation.
The other way in Europe, and then once you get for the holidays things really shut down really after the pretty close to the second half of December.
Great that all makes sense. Thank you so much for your time.
Thank you.
Thank you.
Next is Gary.
Mr <unk> from Barrington Research.
Hey, good morning, everyone. Good morning, Gary Gary.
Nick could you give me those statistics on the collision claims in the quarter from CCC.
I couldnt write it down fast enough.
Do you have that.
Absolutely. So we we think that the best way to look at it given the I mean, the total disruption in 2020 is to compare.
Our organic growth because collision claims actually in the second quarter of 2019, which was a normal year.
For CCC when comparing 2021.
2019 was down 15% 1.5.
Per cent.
An LKQ.
Organic was down 9%.
Okay. Thanks.
Thanks, Tim.
And then.
Just.
In terms of you guys have done a lot of great work on getting the opex down and all of that debt as the business starts growing again when things do return to normal.
Can you run the business.
In a somewhat more of a growth mode like say for years to 7% while holding the personnel.
Expenses as a percentage of sales at 15, 6% or as you grow you have got to add more people.
Well Theres no doubt that as we are.
Grow from a overall dollar perspective.
That means more deliveries more trucks on the road more people in the warehouse.
House.
We can't just grow revenue and not add back any head count, but I've been pretty straightforward with all of my direct reports that we.
We need to see the revenue rebound prior to bringing.
And adding personnel or any really any relative expense.
Back on to the P&L and so.
We think.
Take North America Sarah.
Ongoing basis, we've reset sustainable.
Sustainable margins in the high sixteens.
And if you recall.
2018, we are at.
12, <unk> 2019 were 13.7.
Our analyst day in 2020, we were directing people to be north of 15 last quarter. We told people in the low sixteens and here, we're telling people on a permanent basis long term when you take out all the ancillary ups.
It related to our metals Unlike high sixteens.
It is a good target and so and.
And we anticipate that we're going to have to bring some level of expense back to allow us to have the capacity to.
Grow our revenue base.
Okay. Thank you very much.
Appreciate it.
Thank you.
There are no further questions at this time, Missouri, Nick Zarcone. These continue.
Well, we certainly appreciate your time and attention here. This morning your interest in <unk>.
That means a lot to us we look forward to having another conversation.
<unk> with you in about 90 days, when we report our third quarter results.
At the end of October So we will talk to everybody at that point in time, but again, we appreciate your interest and once again, a big shout out to the 43000 folks who come to work every day at LKQ.
You really make the magic.
Thank you.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect have a good day.
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